Implications of Illicit Financial Outflows for Macro-economic Management and Development Effectiveness in Africa

In Africa, a persistent rise in illicit financial outflows has compounded macroeconomic management challenges and heightened the risks of recurrent balance of payments crises. It has undermined the build-up of fiscal buffers that could have mitigated the macroeconomic impact of adverse external shocks helping to sustain investment. A cross-section analysis suggests that wherever the management of foreign reserves has been undermined in the region, whether by illicit financial outflows in a context of poor governance or by macroeconomic policy malpractices, countries have tended to be more vulnerable to global volatility and commodity terms of trade shocks. Differences across the region’s natural resource-dependent economies in the severity of macroeconomic shocks emanating from global demand contraction and the collapse in commodity prices, suggest that such shocks are probably amplified by illicit financial outflows. Still, sustained illicit financial outflows are also vectors of lopsided growth and unequal distribution of income in both source and destination countries.